Key Factors Driving Trina Solar’s Stock

Like most Chinese solar companies, Trina Solar (NYSE:TSL) has been beset by falling prices that were brought about by industry-wide overcapacity and intense competition. However the company differentiates itself from some of the other large Chinese solar firms through its relatively strong balance sheet as well as its increasing focus on higher efficiency panels. Here is a quick look at some of the key factors currently driving Trina Solar’s stock.

Duties In E.U. Will Hit Shipments: While Europe remained Trina’s largest market as of Q1, with the U.K and Germany alone accounting for nearly 50% of overall shipments, sales are likely to fall going forward as the E.U has imposed anti-dumping duties on Chinese solar products. Trina will initially face duties of around 11.8% until August after which it expected to increase to around 51.5% if China and the E.U. are not able to sort out the dispute through negotiations. [1] We believe that this could be a significant blow to Trina as it would drive up its panel prices in Europe impacting shipments. While the firm could potentially outsource products from other countries to circumvent the duties, it may not be optimal given that the company has invested quite heavily in expanding its manufacturing capacity in China.

China Can Drive Short Term Growth: Trina has been focusing on markets such as China to drive growth. China installed around 3.5 GW of new solar power capacity in 2012 and is expected to become the world’s largest market for solar products this year with demand expected to reach nearly 10 GW. [2] The government has plans to extend its feed-in-tariff program, which was previously available only to large scale plants to smaller distributed solar installations as well. While sales to China slowed down during Q1 due to seasonality, Trina anticipates that China will account for nearly 20% of its overall shipments for the year.

Stabilizing Prices: As of Q1 2013, Trina had posted seven consecutive quarterly losses as panel prices fell sharply. Over 2012, we estimate that Trina’s panel average selling price (ASP) per watt declined by around 40% to about $0.80. However things seem to have improved during Q1, as ASP’s fell at a slower rate of around 6%. [3] The firm has indicted that selling prices will stabilize going forward, and this coupled with falling productions costs could help to improve gross margins.

Focus On Higher Value Products And Markets: Trina has also been focusing on higher value projects and markets. It entered the utility-scale project development business earlier this year, receiving approval to construct its first project in China’s Gansu province and also has contracts to supply panels for other projects in China and South Africa. Trina has been pushing its higher efficiency panels which are preferred for applications in distributed solar systems. The firm expanded manufacturing capacity for its high-end ‘Honey’ polycrystalline panels by around 500 MW last year. While these panels cost slightly more than traditional polycrystalline panels, they offer a higher conversion efficiency of around 15.9%. Profit margins are also likely to be better for these panels since they require less raw material to manufacture every watt of capacity.

The firm is also focusing on higher value markets such as Japan, where the cost per watt of solar power systems are among the highest in the world. For 2013, Trina expects Japan to account for nearly 9% of overall shipments, up from around 3% in the last year. Given the focus on higher value markets, stabilizing selling prices as well as falling production costs, the firm could see an uptick in margins going forward.

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